Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, dropped $1.3 billion in the first quarter of 2005 to $4.0 billion — the lowest level since the second quarter of 2003. Higher imports of goods led to this third consecutive decline in the current account surplus.

Chart 1
Current account balance

In the capital and financial account (not seasonally adjusted), growth in Canada's foreign assets outpaced that in international liabilities for a sixth consecutive quarter. There were moderate increases to both direct investment assets and liabilities with continued growth in Canadian holdings of foreign bonds.

Current account

Goods surplus falls again

The surplus on trade in goods fell $1.3 billion to $13.2 billion in the first quarter. Imports increased $2.5 billion during the quarter while exports rebounded after a large drop in the fourth quarter.

This was the third consecutive decline in the goods surplus. Since the second quarter of 2004, the goods surplus has decreased by almost $6 billion.

Chart 2
Goods and other Current account balances

On the import side, the largest increases were registered in machinery and equipment products and industrial goods. Imports of passenger cars and trucks also increased but this was partially offset by the lower imports of motor vehicle parts.

Exports went up by $1.2 billion with the largest increase in industrial goods. For the third quarter in a row, the exports of automotive products decreased. Exports of crude petroleum products also dropped significantly due to lower prices.

Lower profits on direct investment

The deficit on investment income decreased $0.4 billion to $5.7 billion. This marked only the second time in 11 years that the deficit on investment income was below $6.0 billion.

Profits earned on foreign direct investment in Canada fell by $1.5 billion in the first quarter with the energy and construction sectors showing the largest drops. Dividends returned to a more typical level following the large payments in the fourth quarter.

Chart 3
Direct investment profits balance

Profits earned on Canadian direct investment abroad were down $0.8 billion in the quarter. Dividends earned on foreign portfolio equities were also down.

Services deficit increased slightly

In the first quarter, the deficit on trade in services rose by $0.2 billion to $3.2 billion. Travel was the only major component with significant changes.

Payments on travel services increased $0.3 billion while receipts remained unchanged in the first quarter. During the quarter, a record number of Canadians visited countries other than United States while the number of Canadians spending at least one night in the United States reached its highest level since 1997.

Chart 4
Travel services balance

Financial account

Moderate increase in direct investment abroad

At $10 billion, Canadian direct investment abroad continued to slow from the peak in the second quarter of 2004. An acquisition by a Canadian company of an enterprise in the US financial sector led the quarterly investment. Acquisitions accounted for two-thirds of the quarterly total while four-fifths was invested in the United States.

Chart 5
Canadian direct investment abroad¹

Investment in foreign bonds continues to soar

Canadian demand for foreign securities remained strong in the quarter with most of the investment going to bonds, a continuation of the pattern prevalent for the last two years. For the quarter, Canadian investors bought $6.7 billion in foreign securities with more than four-fifths going to foreign bonds. The investment in foreign securities was the highest since the second quarter of 2002.

Canadian investors bought $5.5 billion of foreign bonds during the quarter, down $1.1 billion from the record purchase of the previous quarter. Half of the first quarter purchase went to US corporate bonds with the rest to overseas bonds and US treasuries. The surge in foreign bond purchases was due in part to foreign issuers, who have increasingly floated bonds in Canadian capital markets. Those foreign bonds are denominated in Canadian dollars.

Meanwhile, Canadians purchased $896 million of foreign stocks in the first quarter. There has been less Canadian demand for foreign equities over the last five quarters. Most of the investment in the quarter was in US stocks ($769 million) with the remainder going to overseas stocks ($127 million).

Chart 6
Canadian portfolio investment in foreign bonds¹

Canadian investors also bought foreign money market paper in the first quarter. Their purchases of $330 million were primarily in overseas short-term securities.

Foreign direct investment in Canada highest in three years

Foreign direct investors made their highest quarterly investment in three years. In fact, the first quarter total of $9.4 billion was higher than the annual totals for the last two years. The foreign investment went to both acquisitions and increases to working capital. For the quarter, most of the investment came from the United States (78%) while industrially it was concentrated in the food and beverages and energy and metallic mineral industries.

Chart 7
Foreign direct investment in Canada

Foreign investment in Canadian securities goes mainly to equities

Foreign portfolio investors upped their holdings of Canadian securities by $4.7 billion in the quarter, less than one-third of the previous quarter's $16 billion. Foreign investors bought mainly equities, as their investment in debt instruments was negligible.

Over half of the $4.8 billion investment in Canadian stocks in the quarter was in other transactions, mainly arising from the takeover of a foreign firm by a Canadian company. This transaction was partly comprised of a share swap whereby the foreign firm's shareholders received new treasury shares from the Canadian buyer. With share prices up almost 4% over the quarter, the remaining foreign investment was in outstanding Canadian shares ($1.9 billion). This was down from the $4.4 billion average of the previous two quarters.

Chart 8
Foreign portfolio investment in Canada

There was a relatively small foreign investment in Canadian bonds of $900 million. Foreign investors bought bonds issued by provincial governments but sold federal government and corporate bonds. In the three previous quarters, foreign investment in bonds averaged $6.1 billion.

The acquisitions of Canadian bonds were by European investors with American investors selling some of their holdings. On a currency basis, investors bought Canadian bonds denominated in other foreign currencies but sold those denominated in US dollars. This was the reverse of the pattern in 2004 when the $20.1 billion acquisition was roughly split between US and Canadian dollar denominated bonds, as non-residents reduced their holdings of bonds in other foreign currencies.

Foreign investors sold $1.1 billion worth of Canadian short-term paper. The sales were concentrated in paper issued by federal enterprises as foreign investors bought small amounts of paper issued by corporations and the federal government. US short-term rates continued to rise from an historic low in January 2004. With Canadian rates relatively stable over this period, the differential has swung to marginally favour investment in United States (18 basis points).

Other investment

Net transactions in the other investment account recorded a large capital outflow as other investment assets grew faster than liabilities. The increase in liabilities came after two quarters of reduction.

For a second consecutive quarter, deposit assets increased substantially, again led by inter-company transactions between Canadian banks and their foreign affiliates. The quarter also saw the largest increase in Canada's international reserves in five years ($3.4 billion), which largely offset the reduction in the previous quarter. On the liability side, the increase was all due to loans under repurchase agreements which increased substantially.

After a strong appreciation over the final quarter of 2004, the Canadian dollar lost some ground against the US dollar, closing the first quarter at 82.67 US cents. However, the dollar posted strong gains against most other major currencies particularly the Swiss Franc, the Euro and the Yen.

Annual revisions, 2001-2004

Annual and quarterly data have been revised for reference years 2001 to 2004. This is in keeping with the general policy to revise National Accounts statistics back four years at the time of the first quarter data release. Broadly, the revisions reflect more current sources of information coming from annual surveys and administrative data.

The latest set of revisions reduced the Current account surplus from 2002 to 2004 while decreasing the net outflows for the Capital and Financial account in 2003 and 2004. Net changes were minor for the other years.

Current Account revisions

Current account surpluses remained virtually unchanged in 2001 but have been revised downward from 2002 to 2004 due to a combination of lower total receipts and higher total payments. For both 2003 and 2004, the total revisions reduced the current account surpluses by more than $5 billion.

On a gross basis, the most important revisions have been registered in the investment income on direct investment. With the latest results of the 2003 annual survey, dividends received on Canadian direct investment abroad have been revised downward by $2.3 billion. The largest corrections were recorded in the metallic mineral sector and in the finance and insurance sector. Projections on dividends received for 2004 were accordingly revised down by more than $2 billion. However for 2004, the changes to dividends have been significantly offset by higher reinvested earnings.

Dividends paid to foreign direct investors were also revised upward considerably in 2003 and 2004 particularly in the energy sector following new information from the annual surveys on the distribution of capital and on financial transactions between Canada and other countries. A partial offset was recorded in the 2004 reinvested earnings which were revised down.

With the most recent results from the Canadian portfolio investment abroad survey, dividends received on this investment have been revised downward from 2001 to 2003. Estimated yields for 2004 were increased, leading to larger revenues than previously released. Portfolio dividends paid to foreign investors were revised upward from 2002 to 2004 as better data became available.  

A new methodology has been put in place to estimate the transactions related to foreign money market assets but the total impact on the income side was relatively small due to the size of this component. It is important to note that the previous estimates to such transactions were included in other investments while the new ones are shown under portfolio investment. 

Services deficits have been increased in each of the four years of revision. Exports of commercial services were revised down particularly in 2001 and 2002. Tooling services (from 2001 to 2004) and research and development (from 2002 to 2004) showed large reductions but those were offset in 2003 and 2004 by increases mainly in management services, computer services, and royalties.

Imports of commercial services have been reduced from 2001 to 2003. The largest drop appeared in 2002 when the total imports were reduced by $1.1 billion. Sizeable corrections were made in the tooling services and to research and development. In 2004, the imports were raised due mainly to an upward change to computer and information services and to royalties.

Large downward revaluations of the services of tooling, engineering, launching, and obsolescence (TELO) of motor vehicle manufacturers have been made to both exports and imports of this category of commercial services from 2001 onward. These revisions followed research and discussions with motor vehicle manufacturers that led to a better understanding of the way services related to production and trade were transacted in that industry. This research revealed that some of these production costs are included in the price of cars and parts whereas they had been treated as separate services in the past.

Globally, the deficit for insurance services has been reduced in 2002 and 2003 but slightly increased in the other years. In 2003, premiums and claims assumed from non-residents and those ceded to them have all been increased for non-life reinsurance but reduced for life reinsurance. The 2004 results are preliminary and based on a small sample of respondents.

In transportation, receipts were decreased from 2002 to 2004, especially due to lower revenues on auxiliary services supplied in Canada to foreign shipping operators and foreign airlines. Passenger fares paid by foreign travellers to Canadian airlines have been revised downward for the fourth quarter of 2004. 

On the other side, imports of transportation services were increased for all of the four years. Freight payments on ocean shipping via the United States were readjusted upward to be closer to the U.S. estimate. A new component of payments for the launching of satellites was added for the year 2002. Expenditures by Canadian airlines on auxiliary services were raised in 2002 but reduced the following year. Finally, the passenger fares were increased in the 2004 with the final figures of the fourth quarter.

Revisions to government services have been relatively small from 2001 to 2004 except for some military expenses for which better information from the public accounts was used back to 2001.

There have been some upward revisions to the payments on education-related travel in 2003 and 2004 leading to a bigger deficit for 2003. However, for 2004, deficit was slightly reduced due to the revisions to the fourth quarter figures.

Corrections to exports of goods have been large in 2004 but were almost all related to fourth quarter price revisions to energy products. Since final prices were lower than those previously estimated, both exports of crude petroleum and natural gas have been revised downward. These corrections contributed to most of the $1.1 billion reduction to the exports for 2004. Undercoverage of exports to other countries than United States was not revised significantly this year. However, new research on this issue is continuing.

On the import side, a large import transaction of machinery and equipment products was removed in 2001 as it was determined that this transaction did not involve a change of ownership but was rather an equipment rental. This transaction counted for most of the $0.6 billion downward revision in 2001. Imports were revised upward in 2003 by $0.8 billion; the largest change came also in the machinery and equipment sector but this time, some transactions were reclassified as trade in goods after it was determined that there had been a change of ownership.

In current transfers, revised figures from non-Canadian sources were responsible for most of the downward changes in the receipts in 2002 and 2003. In 2004, the latest figures on withholding tax earned by the Canadian government counted for most of the increase. Revisions to payments were small. As dividends received were revised down, estimates of withholding tax paid on this income were also reduced. Also, based on the latest public accounts, transfers by the Canadian government have been revised up.

Capital and Financial Account revisions

The net flows on the Capital and Financial account in 2001 and 2002 remained largely unchanged, however outflows were revised downward in 2003 and 2004, affecting primarily Canada’s international liabilities. For 2002, increases to assets were largely offset by increases to liabilities.

The one major change occurring with the annual revision involved a reclassification of transactions in foreign money market instruments. They were moved to portfolio assets from other investment assets beginning in 2002. The measurement was improved by using a survey source that replaced a foreign administrative source for part of the data. As well, a new system based on an instrument by instrument approach was used to process foreign money market transactions, greatly improving the results. Broadly, the increase on portfolio foreign security assets for the years 2002 - 4 was due to this reclassification and improved measurement. Correspondingly, decreases to other investment assets during these years came partially from this change.

The largest revisions to flows were concentrated in 2003 due to the receipt and processing of annual census surveys. The additional transactions reduced assets but increased liabilities. For assets, the changes were concentrated in other investment, both loans and the other asset category, due to the new survey data and the reclassification mentioned above. Increases to liabilities were concentrated in portfolio investment, as additional information boosted new issues of Canadian bonds and stocks sold to non-residents. Transactions augmenting other liabilities came from new survey data.

Additional inflows in 2004 were significant as increases to assets were overwhelmed by increases to liabilities. Within assets, gross outflows on direct investment were revised up due to additional quarterly respondents for the final quarter and from reinvested earnings due to new benchmark data available for the previous year. As well, outflows on portfolio assets rose with the creation of the foreign money market and also some additional responses coming in from monthly surveys. Partially offsetting this were inflows reducing other investment assets mainly stemming from the reclassification but also due to quarterly sources of information that usually arrive with a one quarter lag. The larger changes to liabilities were focussed on the portfolio and other investment accounts. For portfolio investment, transactions boosted foreign investment in money market instruments as additional data became available.  

2002 saw revisions to flows that were largely offsetting in aggregate. Net inflows that increased liabilities were spread through the three main categories: foreign direct investment, other investment and portfolio investment. At the same time, net outflows increased Canadian assets mainly through portfolio investment (reclassification) and Canadian direct investment abroad. The latter was due to survey data that increased the outflows on short-term inter-company accounts.

Text table 1
Balance of payments — Annual revisions 2001-2004